Indian Economy

Before moving ahead to study Indian Economy. We would like to discuss with you some basic concepts of Economics like What is Economics-? Why it is important-? and Current Status of India Economy so that you can harness ur basic concepts in Economics and handle upcoming study material with confidence. Every exam is all about getting clarity of Concepts, which we can get only through logical study

What do you mean by Logical Study-?
To understand the concept of logical study. Let me give you an example.
Suppose you are studying a topic on Inflation. Think logically as a layman, and then you should get the following sequence of questions-

What is inflation-?

Why there is inflation, i.e. causes of inflation-?

So what if there is inflation, i.e. impact of inflation-?

If its impact is negative, then naturally we should find some solutions to reduce it

What can be those possible solutions-?

If the steps to reduce inflation as you think about has already taken by system to cater the problem but inflation is still there, then think what went wrong and what can be an alternate solution-?

Keep in mind the current status of inflation

This is called logical thinking which is an essential trait examiner is looking for in you
So lets move ahead with logical study of Economics, which is an important part of General Studies

What is Economics-?
Economics is a branch of social science. In simple words we can say that Economics is the study of how people choose to use their available resources in most efficient way. Please note down that Economics is not only about managing money and finance. It is much more than that in contemporary context. There is no universal definition of Economics because it is really difficult to cover all aspects of economics into a water tight boundary. Yet some scholars tried to defined Economics in their words as given below-
“Economics is the study of how individuals and groups make decisions with limited resources as to best satisfy their wants, needs, and desires”

“Economics is the social science that examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants”

A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay- “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses

Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime, education, family, health, law, politics, religion, social institutions, war, and even to science

Moral of the story-
Over all we can say that Economics is the branch of social science that studies the production, distribution, and consumption of goods and services in a society
On the basis of above definition, we can break down the study of economics into two broad categories

Microeconomics

Macroeconomics

What is Microeconomics-?
This is a sub branch of economics that deals with economics decisions made at a low, or micro, level. How does the change of a price of good influence a family’s purchasing decisions-? If my wages rise, will I be inclined to work more hours or less hours-?

What is Macroeconomics-?
This is a sub branch of Economics which deals with a larger/broader level of economy. It relates to issues such as determination of national income, savings, investment, employment at aggregate levels, tax collection, government expenditure, foreign trade, money supply and price level etc

Notable Points-

Adam smith is considered as father of Modern Economics. He wrote “The nature & causes of wealth of the Nations” in 1776. He stressed upon wealth aspect of economy

After that Professor Marshall wrote “Principles of Economics” in 1890. He stressed upon welfare aspect of economy

Current Status of Indian Economy-
The economy of India is the 12th largest economy in the world by market exchange rates and 4th largest economy of world by purchasing power parity (PPP) as per the latest report of World Bank. Despite recent global economic recession, Indian Economy is growing at a healthy rate of 6% and considered as one of the fast emerging economy in world along with China, Brazil, South Africa and Mexico. In the 21st century, India is an emerging economic power with vast human and natural resources, and a huge knowledge base. Economists predict that by 2020, India will be among the leading economies of the world. However, Indian Economy is still lagging behind in many spheres like more than 60% of India’s total working population is still engaged into agricultural activates, while its contribution into GDP is only around 18%. India is a labor surplus country and problem of sectional unemployment still a matter of concern for GOI.
India was under social democratic-based policies from 1947 to 1991. The economy was characterized by extensive regulation, protectionism, and public ownership, leading to pervasive corruption and slow growth. Since 1991, continuing economic liberalization has moved the economy towards a market-based system. A revival of economic reforms and better economic policy in 2000s accelerated India’s economic growth rate. By 2008, India had established itself as the world’s second-fastest growing major economy after China. India’s large service industry accounts for 54% of the country’s GDP while the industrial and agricultural sector contribute 29% and 17% respectively. Agriculture is the predominant occupation in India, accounting for about 60% of employment. The service sector makes up a further 28% and Industrial sector around 12%.The labor force totals half a billion workers. India ranked 31st in Financial development index-2009 produced by World Economic Forum

Some Indicators of Indian Economy-

GDP growth in 2008-09 6.7% [due to global recession]

10th Five year plan GDP- 8% [targeted] 7.8% [achieved]

11th Five year plan GDP- 9% [targeted]

Per Capita Income- $1070 [Rank 142nd]

Labor Force- Huge [Surplus]

Inflation (CPI) 7.8% [2008] increasing every day

Population BPL 22% [2008]

Current Challenges before Indian Economy -

Maintaining consistent growth rate of 9%

Reducing widening gulf between rich and poor

Control on increasing population

Producing new employment opportunities

Harnessing potential of human power

Optimal usage of Natural Sources along with sustainable development

Increasing Indian Share into Foreign Trade

What is concept sustainable Development-?
Meeting the needs of the present without compromising the ability of future generations to meet their needs is called sustainable development. This concept is popular in present context of development.

What is concept of Microcredit-?
In common meaning Micro credit is “Loan of very small amount”. It can be defined as provision of parsimony, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. The institutions that provide Micro Credit are called Micro Credit Institutions. Micro Credit is provided to those individuals that lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. This group of individuals includes artisans, tiny and small industries, grocers, vegetable vendors, rickshaw pullers, roadside retailers and the like. Other activities include farming, poultry, cattle rearing, piggery, fishery etc.

The innovative idea of Microcredit originated with the Grameen Bank in Bangladesh. In 1976 Professor Muhammad Yunus launched a research project to examine the possibility of designing a credit delivery system to provide banking services targeted to the rural poor. The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans known as microcredit. The organization and its founder, Muhammad Yunus, were jointly awarded the Nobel Peace Prize in 2006; the organization’s Low-cost Housing Programme won a World Habitat Award in 1998. The United Nations declared 2005 the International Year of Microcredit.

Before the nationalization of banks in India in 1969, co-operative banks were the main dispensers of small loans in the organized sector. Commercial banks were not easily accessible to small borrowers. Those were the days of security-oriented approach. Nobody could think of a loan, big or small, without a guarantor or mortgage of immovable property. Profit was the only motive of the banking. However Nationalization changed the picture and the nationalized banks opened branches in the remotest corners of the country. They were to implement various government schemes like the Twenty Point Program, Antyodaya Program, subsidized Differentiated Rate of Interest loan etc. which aimed at uplifting the poorest of the poor with the help of micro credit.

Gradually there was establishment of Regional Rural Banks (RRBs), Deposit Insurance and Credit Guarantee Corporation (DICGC), National Bank for Rural and Agricultural Development (NABARD), Small Industrial Development Bank of India (SIDBI), Export Credit Guarantee Corporation (ECGC) and the latest Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE). The CGTMSE covers collateral-free credit up to Rs. 50 lakhs. These institutions play supportive roles to ensure uninterrupted flow of credit to small time borrowers. Under the present directive of the RBI, the priority sectors must get a minimum of 40% share of a commercial banks’ total lending. This includes 16% for the agriculture sector.

Some Issues-

In spite of all these measures the performance of micro finance in India has neither been quite satisfactory quantitatively nor qualitatively.

The money disbursed has not been adequate, nor has it yielded the desired results.

Instead of being recycled, the major portions of loans have been lost as bad debt.

Self-Help Groups [SHGs]-
A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs belonging to homogenous social and economic background voluntarily, who come together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis. The group members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment thereof. SHG provides strength to an economically poor individual as part of a group. Financing through SHGs reduces transaction costs for both lenders and borrowers.

SHG-bank linkage Programme-
With a view to facilitating smoother and more meaningful banking with the poor, A pilot project for purveying micro credit by linking Self-Help Groups (SHGs) with banks was launched by NABARD in 1991-92. The aim was to make it possible facilitating smoother and more meaningful banking with the poor. RBI had then advised commercial banks to actively participate in this linkage programme. The scheme has since been extended to RRBs and co-operative banks. More than 90 per cent of the groups linked with banks are exclusive women groups. SHG-bank linkage programme has surely emerged as the dominant micro finance dispensation model in India; other models too have evolved as significant micro finance purveying channels.

History of Indian Economy-
There was a time when India considered as “Sparrow of Gold.” It was the wealth of India, which attracted so many invaders and foreign rulers towards the country at that time. During ancient time when other countries had limited trade activities, India enjoyed a very well developed trade and commerce. The famous silk route of India is very well known even today. After the advent of British East India Company in 1600, the trade activities were in favor of India till 1757. But in the beginning of 18th Century when industrial revolution emerged in England, British used India as producer of raw material for their industries on one hand and exploited the country as potential mark for various goods produced into factories of England. Gradually till 1813 handloom and craft business of India totally ruined by British for their personal advantages. Dada Bhai Narojee exposed the “drain of wealth” from India in his famous work

After Independence-
Independence came with pain of partition to India. Hence it was not easy to put the country on path of rapid development. Indian Government opted for planned economy [a type of economy where economic planning plays very crucial role in the socio-economic development of country]. To achieve the desired and consistent growth in Indian Economy, GOI came up with idea of “Five Year Plans.” To implement this idea Planning Commission was constituted in 1950 and 1st Five year plan was formulated for period from 1951 to 1956. At present 11th Five year plan is going on and Indian economy is growing with a healthy rate of 8% since last on decade

New Economic Policy-
The initial idea of planned economy did not work as well as it was expected. It resulted into heavy burden of external debt on India. Hence GOI came with new economic policy in 1991. The 3 main objectives of this new economic policy was as follows-

Globalization [Unrestricted movement of goods and technology across globe]

Liberalization [Government Control on industries has been relaxed. More and More Sectors gradually opened for commercialization]

Privatization [Handover of public sector to private sector, Disinvestment]

What is Policy of Laissez Faire-?
Laissez Faire is a French term and it literally means no interference. It is a doctrine which states that government generally should not intervene in the economic activities and economy should be market oriented based upon demand and supply principle